Fall in call rates hits liquid funds

With call money rates moving down to 3.25 per cent, liquid funds are facing the heat as returns are also sliding.

Liquid funds are ultra short-term debt funds, which invest in money market instruments such as certificates of deposit, commercial papers and treasury bills, on an overnight basis or 10 days or a month.

Liquid funds, which earlier yielded close to 7 per cent returns, have now dropped to 5-5.5 per cent. Experts say the yields may fall further, with another round of interest rate cut in the offing. With returns being hit, liquid funds may no more remain an attractive parking option for funds in the short term.

“Money has already started moving to liquid-plus funds, which have portfolios with slightly longer tenure. Liquid fund returns will further come down by 200 basis points,” said Surajeet Misra, senior vice-president, Bajaj Capital.

The market regulator, the Securities and Exchange Board of India (Sebi), had earlier said that the nomenclature of liquid-plus funds needed to be changed because investors assumed it would offer higher returns.

Dhawal Dalal, head of fixed income at DSP BlackRock Investment Managers, said, “After the last round of reverse repo cut, overnight call rates have come down sharply to 3.5 per cent. Going forward, short-term money market rates will fall. Those funds which hold assets that mature now, will have to be redeployed at a much lower rate.”

These funds have been quite popular with high networth individuals and corporate investors who use it to park their short-term money in addition to getting better returns than fixed deposits.

Liquid funds saw net inflows worth Rs 14,906 crore in February, as per data from the Association of Mutual Funds in India. However, the income funds category, including liquid plus funds, received much higher inflows at Rs 19,933 crore, indicating that money has already started moving to the liquid plus category. Experts attributed this shift also to the new Sebi regulation, which requires all liquid funds to have three-month maturity paper only, effective May.

“This will further dent the returns. Now, all mark-to-market papers will have to be removed”, said a fund manager, on condition of anonymity.

According to the new Sebi guidelines, liquid funds can invest only in 182-day paper from February and 90-day paper from May onwards.

Sebi came up with the new regulations after the mutual fund industry went through its worst crisis in October, losing Rs 97,000 crore in a single month in assets under management.